1051. Instructions for deduction of tax at source from dividends payable/paid by domestic company to foreign companies after May 28, 1971 at the rate of 24.5 per cent specified in Part II of First Schedule to Finance (No. 2) Act, 1971

1. I am directed to say that in the Finance (No. 2) Bill, 1971, introduced in Parliament on May 28, 1971, it has been proposed to amend the provisions in section 80M. Under the scheme of the said provisions, inter-corporate dividends are subjected to tax at a concessional rate, by allowing a deduction of a specified per­centage of the dividends in computing the taxable income of the company receiving the dividends and taxing the remainder at the rates of tax applicable to the ordinary income of the company. Prior to the introduction of the Bill, a foreign company receiv­ing dividends from a domestic company was entitled to a deduction in respect of such dividends from its taxable income at the following rates :

(i) where the company paying the dividends is a closely-held Indian company mainly engaged  
    in a priority industry 80 per cent
  (ii) in any other case 65 per cent.

In view of the concessional treatment as mentioned above, the incidence of tax on the aforesaid dividends is worked out as under :

  Dividend Deduction Net Rate of tax on Effective rate on
  income, say u/s 80M dividend ordinary income the whole of the  dividend
  Rs. per cent per cent per cent per cent
In the case 100 80 20 70 14
of Sl. No. ( i)          
above          
In the case 100 65 35 70 24.5
of Sl. No. ( ii)          
above          

2. It has now been proposed in the Bill to do away with the concessional treatment granted to the foreign companies on their dividend income from closely-held Indian companies mainly engaged in a priority industry. In such cases, therefore, the deduction admissible under section 80M would be 65 per cent  as against the existing rate of 80 per cent. In view of this amendment, the effective incidence of tax on dividends received by a foreign company from any domestic company will henceforth be 24.5 per cent.

3. Prior to the introduction of the Finance (No. 2) Bill, 1971, the rate for deduction of tax at source from dividends received by a foreign company from a closely-held Indian company mainly engaged in a priority industry was 14 per cent. As a corollary to the amendment proposed in section 80M, necessary modification has also been made in item 2(b) of Part II of the First Schedule to the said Bill with the result that the rate for deduction of tax in respect of dividends paid by any domestic company to a foreign company will now uniformly be 24.5 per cent. As it is intended to secure collection of the full amount of tax due on the dividends payable to a foreign company (thereby obviating the need for collecting a further amount on assessment in the subsequent year), it is requested that deduction of tax at source may be made at the revised rates in respect of all such dividends pay­able/paid after May 28, 1971. In regard to payments of dividends during the period from April 1 to May 28, 1971, tax would have been deducted at source only at the rate of 14 per cent pre­scribed last year and continued in force by the earlier Finance Act, 1971. Where the remittance of such dividends has already been made, the deficiency has to be made good in the assessment for the year 1972-73, to the extent possible. Where, however, the remittance of dividends has not so far been made, the Reserve Bank will insist on the shortfall in the tax deduction being made up before authorising remittance. As regards dividend payments to be made after May 28, 1971, the Reserve Bank would, no doubt, ensure that tax is deducted at the rate of 24.5 per cent and only the balance is allowed to be remitted.

Circular : No. 61 [F. No. 275/37/71-ITJ], dated 19-6-1971.

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